Lately, water shortages, and in particular rural droughts, have been in the news. While the farmers in many regions certainly are suffering, and there are definitely enough meaty economic issues around farmers’ current water allocations and associated issues, I want to concentrate on economic issues around water use by (mainly urban) households, and what role demand management should play.

For the most part, New Zealand has heaps of water. Yet in Wellington, where I live (for instance) sprinkler usage is currently rationed, and there is talk of an all out sprinkler ban if a big downpour doesn’t happen soon (the recent trickles are only holding things off for a while). That is because the main sources of drinking water in the region – the water catchment area in the rimutukas (near Wainui), the Hutt River near Kaitoke, and the Aquifers under the Hutt Valley, are all at about the limit of what they can give without incurring major damage, due to the recent low water flows. Now there are still plenty of options for ways to take more water. We could flood more pristine valleys to make damns, or we could take from other waterways. Of course, doing this has costs. First, there is the loss of amenity value of having properly flowing rivers, or of a nice pristine valley. Some might even consider the loss of ecosystems to be of value in itself. Then there is the recreational activities that could be impaired – fishing, swimming or walking dogs along the river and for a swim (both were banned in the Hutt river for a while as low flows partly caused by water taking caused toxic algae to bloom, killing 3 dogs and prompting a ban on himan and animal use of the river), and other fun activites such as rafting etc. The list goes on.

Then there is the infrastructure cost of establishing pipeline networks, treatment facilites etc to take the water from these sources and deliver it to the household, and electricity chemicals etc also used (not to mention the treatment of wastewater down the track). Basically, if we want more water, we are going to have to pay for it, indirectly in terms of the effects of extracting it from some water source, and the direct costs of treating it and transporting it to its end use.

But do we really need all of this water? To many foreigners, our water use would be considered wasteful in the extreme. Compared to some countries, our per capita use is around twice theirs. Surely we could be a little less wasteful without reducing out standards of living? But then, is there any incentive not to waste water?

In Australia, not only do they have water pricing, but they also have labelling of domestic water using products for their water efficiency, as well as minimum standards on products for their efficiency of water use. The latter two don’t seem to impose any major costs on consumers or producers. And surely the former (water pricing) is a valid way of making users pay for both the direct cost of the infrastructure that treats and carries the water to them, and the indirect environmental and amenity/recreation costs – certainly, isn’t it better than taking it out of rates? Of course, a few regions in New Zealand alread have water pricing, but as I understand it there are some real issues with how this is done. Done properly, the charges could be used to lower council rates to more efficiently gather revenue, while providing a price signal to account for the true costs of providing domestic water.

What do you think? Should water be charged for directly, rather than paid for out of rates? If so, how should the charge be levied? Fixed monthly rate, variable charge (ie per cubic metre), or a mix? Should it only cover the infrastructure costs to council, or the environmental/amenity/recreation costs too? Or should there be a profit element as well?

I would be interested to hear any points of view.

Repressed Mandarin DT

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It’s a difficult issue, and without running some cost-benefit analysis it is difficult to figure out what the best option is.

I mean, we need a price in order to allocated the scarce resource that is water. However, we also need to ensure sufficient investment in infrastructure, and security of supply – it sounds like the electricity generation industry doesn’t it 😉

The marginal cost of supply extra water is high. But the price is still zero to consumers. Therefore it creates a classic example of allocative inefficiency. Assuming the costs of installing water meters is relatively low, it would be more efficient to charge per unit of water. (and I’m not just saying this because I only have 1 bath per month…)